Sarah Bradford looks at how the end of the tax regime for furnished holiday lettings can impact landlords who are married or in a civil partnership.
The special tax regime for furnished holiday lettings (FHLs) came to an end on 5 April 2025. After that date, FHLs are treated in the same way as other residential lets for tax purposes. This change removed many of the advantages previously enjoyed by landlords letting furnished holiday accommodation.
The loss of the various capital gains tax reliefs, including business asset disposal relief, previously available in respect of FHLs has been well documented, as has the change to the way in which holiday let landlords receive relief for interest; from 6 April 2025 onwards, relief for interest and finance costs has been given as a basic rate reduction rather than by deduction. Where a furnished holiday let is jointly owned by a married couple or by civil partners, the way in which the income is allocated for tax purposes has also changed.
The old rules
Under the FHL regime, where a property is jointly owned by a married couple or by civil partners, the couple could choose how to allocate the rental profits between them for tax purposes. The normal default 50:50 split did not apply and the chosen allocation was not dependent on their underlying ownership shares.
This was great from a tax planning perspective, where the spouses or civil partners paid tax at a different marginal rate of tax, as all or a greater proportion of the rental profits could be allocated to the spouse or civil partner paying tax at the lowest rate, to minimise the couple’s combined tax bill. However, this flexibility is lost for 2025/26 onwards.
Current rules
From 6 April 2025 onwards, income from furnished holiday lets is treated in the same way as that from other residential lettings, and this includes the way in which income from properties jointly owned by married couples and civil partners is taxed.
The default position is that income from assets jointly owned by married couples and civil partners is treated for tax purposes as if they each receive 50% of that income. This rule applies regardless of the actual income received by each spouse or civil partner.
Married couples and civil partners will need to assess what this change in the allocation of rental profits means for them, and whether action is needed.
Impact
The following example illustrates the impact of the change in the rules.
Example 1: Profit allocations before and after the change
Andy and Abigail are married and have been letting a holiday let for a number of years. Their rental profits are £20,000 a year. Abigail pays tax at 40% and has income, excluding the rental income of £70,000 a year. Andy pays tax at the basic rate and has income excluding the rental income of £35,000 a year.
For 2024/25 to minimise their combined tax bill, they choose to allocate £15,270 of the income to Andy and the remaining £4,730 to Abigail. Andy pays tax at 20% on his share – a tax bill of £3,054. Abigail pays tax at 40% on her share – a tax bill of £1,892. The couple’s combined tax bill is £4,946.
In 2025/26, the rental profit remains at £20,000 and the spouse’s other incomes are unchanged. They allocated the profits in the same way as in 2024/25. However, due to the change in the rules, for tax purposes, the profits are treated as allocated on a 50:50 basis, so that each spouse has taxable rental profits of £10,000. Andy pays tax at 20% on his share – a tax bill of £2,000. Abigail pays tax at 40% on her share – a tax bill of £4,000. For 2025/26, the couple’s combined tax bill on their rental profits is £6,000.
As a result of the change in the way income from the holiday let is allocated for tax purposes, the couple pay £1,054 more in tax in 2025/26 than on the same income in 2024/25.
Can anything be done?
Where the change in the rules results in a harsher tax outcome, depending on how the property is owned, it is possible to move away from the default 50:50 split.
Property can be jointly owned as tenants-in-common or as joint tenants. Where a property is owned by tenants-in-common, each co-owner owns a specified share of the property. By contrast, where a property is owned by joint tenants, all the co-owners jointly own the whole property. The way in which the former holiday let is owned determines whether it is possible for the income to be allocated for tax purposes other than equally.
Where a property is owned by a married couple or by civil partners as tenants-in-common in unequal shares, they can choose for the income to be allocated for tax purposes by reference to their actual underlying share in the property. To do this, they must make a Form 17 election. The form is available on the Gov.uk website (https://tinyurl.com/HMRC-Form17-Declaration).
The election will only be beneficial if it provides a better outcome than the default 50:50 split. This will be the case if the spouse or civil partner with the greatest share pays tax at a lower marginal rate.
Example 2: A different profit share
Assume the facts are as in Example 1 and that the former holiday let is owned by Abigail and Andy as tenants-in-common, with Andy having a 70% share and Abigail a 30% share.
If they make the election, 70% of the rental profit (£14,000) will be allocated to Andy for tax purposes, on which he will pay tax of £2,800 (i.e., 20% of £14,000). The remaining 30% (£6,000) of the rental profits is allocated to Abigail for tax purposes, on which she will pay tax of £2,400 (i.e., 40% of £6,000). The actual allocation of profits is irrelevant. The couple’s combined tax bill if a Form 17 election is made is £5,200. As this is better than the £6,000 they would pay on a 50:50 split, the election is worthwhile.
If instead Andy had owned a 30% share and Abigail had owned a 70% share, the couple would pay tax of £6,800 (i.e., (£6,000 @ 20%) + (£14,000 @ 40%)) if a Form 17 election is made. In this instance, the election would not be worthwhile, as the couple’s tax bill would increase.
Where a Form 17 election is made, it must reach HMRC within 60 days of the date of the last signature for it to be valid. The election will not have effect if it is received by HMRC outside this timescale. Income is treated as arising in accordance with the underlying beneficial ownership from the date of the Form 17 election – income received prior to the date of the election is treated as arising equally. Thus, if a couple wish for the rental income for the tax year to be allocated in accordance with the actual ownership of the property, the election must be made at the start of the tax year.
The timing rules mean that it is not possible to wait until after the end of the tax year and see what income each party has received and then decide whether the election would be beneficial or not. This could be problematic if income is uncertain and it is not possible to know in advance whether the election will be beneficial. A Form 17 election cannot apply retrospectively.
An election cannot be made where the property is owned as joint tenants as each owner jointly owns 100%. To move away from a 50:50 split, the couple would need to change the way in which the property is owned.
Changing the beneficial ownership
If the current ownership does not give an optimal result for income tax purposes, the couple can make use of the ‘no gain, no loss’ rules to transfer a share in the property from one spouse or civil partner to the other, to give the preferred beneficial ownership shares.
Practical tip
Married couples and civil partners who jointly own a holiday let should assess what the end of the tax regime for FHLs means for their tax bill, and where they own the property as tenants-in-common in unequal shares, consider whether a Form 17 election would be beneficial.
